Can You Get a VA Home Loan with Bad Credit? A Detailed Guide

If you’re a military borrower, getting approved for a VA loan with bad credit is possible, regardless of any blemishes in your financial history. The U.S. Department of Veterans Affairs (VA) will even guarantee mortgages for veterans who have overcome a previous bankruptcy or foreclosure.

Purchasing a home is an exciting milestone in life. However, bad credit can make it challenging to get approved for a mortgage. If you’re a military service member or veteran with less-than-perfect credit, you may be wondering if VA loans are still an option.

The good news is, yes you can get a VA home loan with bad credit. VA loans are an attractive option for borrowers with credit blemishes because the program offers more flexibility than conventional loans.

In this comprehensive guide, we’ll explain everything you need to know about getting a VA mortgage with bad credit, including:

What credit score is considered bad for a VA loan
Tips for improving your credit score
How to get a VA loan after bankruptcy or foreclosure
VA loan requirements and what’s flexible
Types of VA loans available for bad credit borrowers

Let’s dive in…

What Credit Score is Considered Bad for a VA Loan?

The VA itself does not have a minimum credit score requirement. Guidelines are set by individual lenders. Many lenders require a minimum score around 620. However, it is possible to get approved with scores in the 500-600 range if you shop around.

Here’s a quick guide to credit score tiers:

Excellent: 800-850
Very Good: 740-799
Good: 670-739
Fair: 580-669
Poor: 500-579

So while scores under 620 are generally considered bad credit, that doesn’t mean VA approval is impossible. The key is finding a lender willing to work with your current score.

Tips for Improving Your Credit Score

If your score falls on the lower end, taking steps to improve it can increase your chances of VA loan approval. Here are some tips:

Pay bills on time. Payment history is the biggest factor in your score. Set up autopay or reminders to avoid missed payments.
Lower credit utilization, This means keeping balances low compared to limits, Shoot for 30% or less,
Avoid applying for new credit. Each application causes a hard inquiry that dings your score.
Pay down debt. Focus on paying down balances, especially on revolving debt like credit cards.
Check for errors on your credit reports Dispute any inaccuracies with the credit bureaus,
Consider credit counseling. Non-profit credit counseling provides education and can help negotiate with creditors.

With diligence and time, you can improve your credit health. Just don’t expect overnight results.

Getting a VA Loan After Bankruptcy or Foreclosure

If you’ve had a bankruptcy or foreclosure, you may have to meet additional requirements before getting VA approved. Here’s an overview:

Bankruptcy

Chapter 7: 2 year waiting period after discharge.
Chapter 13: 1 year of on-time payments in repayment plan.

Foreclosure

2 year waiting period from date of foreclosure completion.

The VA may provide more flexibility than conventional loans regarding these derogatory credit events. However, each lender will have their own guidelines. Be prepared to provide details and documentation.

VA Loan Requirements and What’s Flexible

Now let’s look at key VA loan requirements and which offer flexibility for borrowers with bad credit:

Credit Score

No set minimum – up to lender guidelines

Debt-to-Income Ratio

41% max – can exceed with compensating factors

Residual Income

Varies – can provide alternate documentation

Down Payment

None required – 100% financing available

As you can see, VA loan underwriting takes a holistic approach. Weaknesses in one area can potentially be offset by strengths in another.

For instance, a high DTI ratio may be acceptable if you have a large down payment, solid employment history, or significant assets.

Types of VA Loans Available for Bad Credit

Below are the main types of VA loans potentially available with bad credit:

VA Purchase Loan

This allows veterans and military members to buy a primary residence with 100% financing. Ideal for first-time homebuyers.

VA Cash-Out Refinance

Lets existing VA loan borrowers tap into home equity by replacing their current mortgage. Funds can be used for any purpose.

VA Streamline Refinance

Enables refinancing an existing VA loan into a lower rate/payment without an appraisal or income verification. Limited cash-out allowed.

VA Renovation Loan

Combines features of a purchase loan and construction loan to buy and renovate a home in one VA-backed mortgage.

While bad credit makes approval more challenging, a VA loan may offer more flexibility than conventional financing. Be sure to work with a reputable VA lender familiar with credit exceptions and guidelines.

The Bottom Line

The road to homeownership with bad credit may have some extra obstacles, but VA loans provide active military and veterans a path forward. Scores between 500-619 are generally considered bad credit, but VA doesn’t have an explicit minimum score requirement. You can potentially get approved by finding the right lender and taking steps to improve your credit over time.

With diligence and patience, VA financing can help you achieve the dream of owning your own home despite credit challenges. And nothing beats the stability and financial benefits of being a homeowner. Don’t get discouraged! Do your homework and leverage the options available with your earned VA benefits.

can you get a va home loan with bad credit

Getting a VA loan after bankruptcy or foreclosure

After bankruptcy or foreclosure, most lenders enforce a waiting period before you can get another loan. This is also true for VA loans, but the mandatory waiting periods can be far shorter than you’ll find with most other loan programs.

Key VA loan requirements: Which are flexible?

Credit score: No set minimum

As we covered above, VA loans have built-in flexibility that allows you to compensate for factors like low credit, no credit, bankruptcy or foreclosure with alternative documentation or compensating factors. You may qualify for a VA home loan with bad credit if you have enough extra room in your budget each month.

Debt-to-income ratio: 41% maximum

Your DTI ratio expresses what percentage of your gross monthly income goes toward debts, including the home loan you’re applying for. If your DTI exceeds 41%, you can still get a VA loan as long as:

• Your DTI is high because you have significant tax-free income.

• You can compensate for a high DTI with around 20% more residual income than is normally required.

Residual income

The VA uses a metric it calls residual income to assess how much free cash you have each month after subtracting your monthly expenses, including home maintenance. Residual income requirements are based on your location and family size. If you can’t meet the minimum amount of residual income required, you might be able to work around this by:

• Getting a family member excluded from your residual income calculation.

• Proving that you receive significant benefits based on your military service status.

Can I Qualify For a VA Loan With Bad Credit? (VA Mortgage Updates and First Time Home Buyer Advice)

FAQ

What is the lowest credit score for a VA loan?

The U.S. Department of Veterans Affairs doesn’t set a specific VA loan credit score requirement. Lenders, however, can set their own minimum requirements for a VA loan. Most require a score of at least 620, but some go as low as 500.

Can I get a VA home loan with a 480 credit score?

Key Takeaways. No Minimum Credit Score – The VA loan program does not enforce a minimum credit score, focusing instead on the overall loan profile. Private Lenders’ Role – Private lenders will likely have minimum credit score requirements, typically that will range between 580-620, which can affect loan terms.

Can you get a VA home loan with a 550 credit score?

There is no minimum score for getting a VA home loan. However, it may be harder to find a lender (remember, the VA is guaranteeing the loan, not lending the money) if your credit score is under 620. Let’s say you have a credit score of 550. Most lenders won’t make loans to you.

Are VA loans hard to get approved?

VA loan denial isn’t uncommon, but your odds are generally better with a VA loan. According to HMDA data, 12.93% of VA loan applications received a denial in 2022, compared to 17.29% of FHA loans and 17.9% of conventional loans. While not uncommon, many scenarios may be preventable.